Customer Profitability Initiatives Feed Organic Growth and a High Rate of Return

By Cathy Lone-Dawson

The TowerGroup predicts 2005 is expected to be �a year for organic growth� for financial institutions. In other words, growth will be driven from within, through new products and services, greater operational efficiency and customer networking value.

Acquiring and cultivating long-term, highly profitable customer relationships is a derivative of understanding customer life-time value. The Banks, Telco�s and even Utilities understand this reality and are leveraging organic growth and decreasing costs by focusing on customer profitability. Few insurance companies are not taking advantage of the same opportunity.

Take for example a typical property and casualty insurance (P & C) company; an �A customer�� the company�s most profitable – is one who has never placed a claim. A �B customer�� considered less profitable�is so categorized because he has made a claim. This extremely basic segmentation, however, is leaving huge profits on the table.

By failing to appropriately segment a client base by profitability, many insurance companies are delegating responsibility for their profitability. Often it is left up to a network of brokers and agents to determine. This glaring weakness is changing, as companies realize the short-sightedness of not addressing customer profitability themselves.

Statistics show that it costs 10 times more to acquire a new customer than to sell the same business to an existing customer. A 2002 study by Peppers & Rogers Group, as reported in Financial Services Marketing Magazine, found that three in 10 customers who experience a good relationship with their provider say they will likely add one or more products or services from that provider to their portfolios. Fifty-five percent of customers who rate their primary insurer high on service quality report they are “very likely” to consolidate their business with one provider.

Since all customers are not created equal, high performing Insurers are able to distinguish the customers who generate the most profit from those who actually cost money. These companies focus their resources on cultivating relationships with these profit-generators — or customers who look like them who could be future profit-generators — while delivering lower-expense services to less profitable customers while still fulfilling their expectations.

A range of criteria must be taken into account when evaluating customers within an insurance context. There are expense-driving factors such as sales/servicing (commissions), claims, policy administration, channel usage and transaction frequency. On the revenue side, factors include premiums paid, average product holding, share of wallet and loyalty. A more robust analysis of customer value facilitates the shifting of resources away from lower-value customers and toward customers with higher actual and/or potential value to the enterprise.

Moreover, profitability ranking enables a company to quantify its customer objectives ie.to retain its most profitable customers, to grow those with the highest potential or to manage high cost customers more carefully. It also allows insurance companies to manage profitability at a household level by improving utilization of existing products, proactively underwriting and raising premiums and consolidating relationships from competitors using bundling and re-pricing of products.

Insurers who undertake a customer profitability initiative can expect a higher return on investment with their most valuable customers. Customer appreciation campaigns that recognize patronage, right-size product portfolios and up-sell new products are yielding returns in the 150% to 700% range.

The benefits of these types of campaigns are substantial. Such organic growth drives down development costs by focusing on the wants and needs of a company�s most valuable customers, while eliminating initiatives which are of marginal value to this group, and also increases customer loyalty in this most rewarding segment.

For more information about segmentation, read Customer Behavioural Segmentation: The Next Level in Insurance Marketing, also by Cathy Lone-Dawson.

Cathy Lone-Dawson is the President of CRM Matters which specializes in CRM process change management in the areas of marketing, sales and service. With her expertise in Insurance and intellectual capital from engagements in insurance and other industries, she is well positioned to support your CRM initiatives.
She can be reached at 416-526-4859 or via e-mail: cathy.lonedawson@rogers.com.